Hulley v. Russia 2014

merits, it is clear that those actions had nothing whatsoever to do with the genuine exercise of the Russian Federation’s taxation powers, but were rather solely intended to destroy Yukos and gain control of its assets. Article 21 ECT clearly was not meant to shield a Contracting Party from such egregious conduct.

78.Even assuming, however, that the Russian Federation’s actions were a genuine exercise of its taxation powers, which they were not, those actions would nonetheless fall outside the scope of Article 21 ECT, which is limited to the enactment of tax provisions. Further, even if Article 21 ECT were applicable, which it is not, Article 21(5) ECT ensures that Article 13(1) ECT’s substantive protection from expropriation remains fully intact. Finally, under any interpretation of Article 21 ECT, many of the Russian Federation’s actions had nothing to do with taxation and thus fall outside the ambit of Article 21 ECT altogether.

79.Conversely, under the Respondent’s interpretation of Article 21 ECT, save for expropriatory “charges or payments, to the exclusion of enforcement and collection measures, including interest and fines”, investors would stand unprotected from any and all State actions, so long as the respondent State in an arbitration labels its actions as “taxation”—regardless of whether such actions had anything to do with taxation, or were being pursued with the sole aim of expropriating or otherwise harming an investor’s investment. Such an interpretation, which would turn Article 21 ECT into a gaping hole in one of the key multilateral treaties on investment protection, is clearly untenable and should be rejected.

80.The Respondent’s so-called “unclean hands” theory is without merit. The Respondent argues that over a period of approximately 12 years, an array of actors engaged in a variety of allegedly “illegal and bad faith misconduct” that somehow deprive the Claimants’ investments of ECT protection. The Respondent’s position is fundamentally unfounded for several reasons. First, the so-called “unclean hands” theory finds no support in the text of the ECT, customary international law, or investment treaty jurisprudence. Second, even assuming the existence of such a general principle of international law, which the Claimants deny, its scope would be dramatically more limited than the Respondent contends, such that the Respondent has not alleged any facts that could establish its applicability in the present case. As demonstrated by the Claimants, the Respondent’s theory is premised almost exclusively on allegations of collateral illegalities, unrelated either to the making of the Claimants’ investments, or to the Claimants’ claims in these arbitrations, and all but one of which assert misconduct by third parties. Third, and in any event, the Respondent has failed utterly to substantiate any of its allegations. Finally, the principles of estoppel and proportionality prevent the Respondent from invoking such alleged illegalities in an attempt to escape liability for its violations of the ECT.

81.In its Rejoinder, while recounting its laundry list of alleged misconduct, the Respondent devotes attention solely to its allegation concerning the application of the 1998 Russia-Cyprus Double Taxation Agreement (“DTA”). Apart from the fact that: (i) this allegation has no bearing on the merits of these arbitrations; and (ii) these arbitrations are not the appropriate forum to hear and decide an alleged dispute on the application of the DTA, the Claimants have, in any event, demonstrated that this allegation is baseless. The Respondent’s so-called “unclean hands” objection is thus without merit and must fail.

VI. REQUEST FOR RELIEF

82.For the reasons set out above, the Claimants respectfully request the Arbitral Tribunal to render an Award granting the relief set out in paragraph 1199 of the Claimants’ Reply.

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B.RESPONDENT’S SKELETON ARGUMENTS

109.The text of the paragraphs below is produced directly from paragraphs 1 to 104 of Respondent’s Skeleton Argument submitted on 1 October 2012 (“Respondent’s Skeleton”) (annexes omitted).

I.The Russian Federation Properly Assessed Taxes And Fines Against Yukos

1.Yukos fraudulently evaded billions of dollars of Russian corporate profit tax from 1999 to 2004, abusing the program authorized by the Russian Government in the early 1990s to foster economic development in designated economically underdeveloped areas. Under this program, corporate profits in the low-tax regions were taxed at substantially reduced rates if the taxpayer complied with the applicable legal rules, including Russia’s anti-tax abuse principles.

2.In order to properly avail itself of the benefits available in a low-tax region, Yukos was required to comply with three legal regimes: (a) the federal statute authorizing the low-tax region program and the region’s own statutes; (b) Yukos’ agreements with the regional authorities; and (c) Russia’s federal anti-tax abuse “bad faith taxpayer” doctrine.

3.The federal bad faith taxpayer doctrine is rooted in Russia’s federal Constitution, and has been applied by Russian tax authorities and courts in thousands of cases since the mid-1990s to condemn abusive transactions that, in substance, constitute unlawful tax evasion. As described by Yukos’ own tax lawyers in commentaries they published before the assessments at issue in these arbitrations, this doctrine condemns as tax evasion transactions in which “the taxpayer’s actions were aimed solely to reduce the amount of its tax payments rather than to achieve an economic result, [as] this would demonstrate that the relevant transaction was inconsistent with law because the motive underlying such transaction was to avoid tax […]. A person’s actions aimed solely at tax evasion may not be regarded as actions made in good faith.”

4.Yukos abused the low-tax region program, and evaded Russian corporate profit tax in violation of the bad faith taxpayer doctrine, by implementing what Yukos referred to internally as its “tax optimization” scheme. Pursuant to this scheme, Yukos established dozens of sham “trading companies” in low-tax regions that had no business purpose, and then shifted its own profits to the sham trading companies. These sham trading shells had no genuine economic substance and served no purpose other than to reduce Yukos’ tax liabilities, an arrangement described by Yukos’ own lawyers as constituting unlawful tax evasion.

5.The European Court of Human Rights (“ECtHR”) unanimously rejected Yukos’ challenge of the tax assessments that are at issue here, on the basis of the same core principles that underlie these arbitrations. The ECtHR found that Yukos’ “tax optimization” scheme consisted of “switching the tax burden from [Yukos] and its production and service units to letter-box companies in domestic tax havens in Russia,” and that these “letter box companies” had “no assets, employees or operations of their own [and] were nominally owned and managed by third parties, although in reality they were set up and run by [Yukos] itself.”

6.According to the ECtHR, the “letter-box companies” (a) purchased oil and oil products from Yukos’ production companies at a fraction of their true market prices, (b) “acting in cascade, then sold the oil either abroad, this time at market price or to [Yukos’] refineries and subsequently re-bought it at a reduced price and re-sold it at the market price,” (c) thereby accumulated most of Yukos’ profits in the low-tax regions, resulting in Yukos paying substantially lower taxes on those

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profits, and (d) then unilaterally transferred to Yukos, as a gift or in purported repayment of sham loans, the profits that had been improperly taxed at reduced rates in the low-tax regions. The ECtHR unanimously concluded that this scheme “was obviously aimed at evading the general requirements of the Tax Code […].”

7.The Russian tax authorities concluded that Yukos’ “tax optimization” scheme constituted unlawful tax evasion under the bad faith taxpayer doctrine. In particular, the Russian tax authorities found, and the Russian courts later agreed, that Yukos had abused the low-tax region program because its trading shells (a) did not engage in any genuine business activities in the low-tax regions, but were instead controlled by Yukos from Moscow, (b) purchased oil and oil products at below-market prices solely to artificially concentrate Yukos’ profits in low-tax regions, and (c) made only paltry investments in the low-tax regions that were dwarfed by the tax benefits they claimed, thereby failing to fulfill the purpose of the low-tax region program.

8.Yukos did not then -- or later -- offer any rationale for selling Yukos’ oil through its network of low tax region trading companies other than reducing Yukos’ own tax liabilities, nor have Claimants done so in these arbitrations.

9.Yukos was aware of the bad faith taxpayer doctrine and the risk that its scheme would result in substantial tax assessments if the Russian authorities were ever to learn of it. Among other things, (a) Yukos knew that the authorities had previously denied the low-tax region benefits claimed by several sham trading shells in the Lesnoy region and Sibirskaya based on the same Russian anti-abuse rules that were later applied to Yukos (the Russian authorities only later learned that Yukos exercised de facto control over and management of Sibirskaya and the Lesnoy trading shells, and that Yukos surreptitiously liquidated the latter in order to prevent the collection of their overdue taxes), (b) Yukos managers had expressly warned the company’s senior executives in internal memoranda that public disclosure of the scheme “will result in substantial tax claims against the Company,” (c) as Yukos’ former deputy general counsel later conceded, none of the company’s external lawyers was willing to render an opinion endorsing its scheme (to the contrary, in refusing to render a “clean” opinion, one cited the need to comply with the same bad faith taxpayer doctrine that later led the Russian tax authorities and courts to find that Yukos was guilty of tax evasion), and (d) Yukos had access to the numerous court decisions applying the bad faith taxpayer doctrine to abusive tax schemes -- including those finding Lukoil, one of Yukos’ major competitors, liable for substantial additional amounts for having abused the low-tax region program -- and to the published legal commentaries discussing the bad faith taxpayer doctrine and its requirements, including those written by its own tax lawyers.

10.Yukos’ knowledge that its “tax optimization” scheme was unlawful is further confirmed by Yukos’ repeated lies to the tax authorities, the Russian courts, the ECtHR, and Yukos’ own external auditors, including Yukos’ knowingly false assertion that it was not affiliated with (and did not control) the sham trading shells, a point now conceded even by Claimants. Yukos’ repeated false denial of its affiliation with the sham trading shells can only be explained by the company’s awareness of the illegality of its scheme.

11.Yukos’ tax evasion was not victimless. The billions of dollars in tax benefits it wrongfully claimed caused commensurate damage to the regional budget of Moscow, where Yukos, as the real party in interest, should have paid profit tax at the full rate.

12.Claimants’ claims that the Russian authorities’ measures were expropriatory and unfair are meritless. First, Claimants’ contention that the legal principles applied by the Russian courts were “novel” or “vague” is, as the ECtHR unanimously found, refuted by the numerous Russian court decisions that applied these principles and similar ones to hold taxpayers liable for tax evasion since the mid-1990s, including

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their abuse of the low-tax region program. Moreover, the published legal commentaries, including the guidance published by Yukos’ own tax counsel, describe those principles in the same terms as they were applied to Yukos. The relevant Russian judicial precedents include those compiled for the Tribunal by Russian tax law expert Oleg Konnov, whose description of the history and content of the bad faith taxpayer doctrine Claimants have not sought to rebut with any expert testimony.

13.Mr. Konnov shows that the fines assessed against Yukos were also proper because, among other reasons, no taxpayer -- in Russia or elsewhere -- could legitimately claim to be surprised that it may not invoke a limitations period that has expired only because of its own obstruction of tax audits.

14.Claimants also ignore the extensive international precedents demonstrating that the principles applied by the Russian authorities and the actions they took against Yukos’ tax evasion were consistent with those of ECT signatories and other nations worldwide.

15.Second, Claimants’ attack on Yukos’ VAT assessments -- holding Yukos liable for the VAT due on revenues nominally realized by the sham trading shells but properly attributable to Yukos itself -- is also meritless. As the ECtHR unanimously held, the Russian authorities acted properly in disregarding Yukos’ sham trading shells for profit tax purposes and denying Yukos the benefit of the shells’ 0% VAT filings. Claimants also ignore Yukos’ still unexplained failure to submit proper 0% VAT returns in its own name after it received its December 29, 2003 tax audit report. It is not disputed that Yukos could have filed proper VAT returns -- nothing prevented it from doing so -- or that had it done so, it would have avoided more than half of its challenged tax liabilities.

16.Third, Claimants’ assertion that the tax assessments were discriminatory is contradicted by the facts. The ECtHR unanimously rejected this charge. Several large Russian companies, including a number of Yukos’ principal competitors, were also held liable for tax evasion and assessed substantial amounts of tax on grounds similar to those relied on by the Russian authorities and courts in dealing with Yukos. But unlike Yukos, these other companies promptly paid their taxes and, in the case of Lukoil, publicly abandoned its own “tax optimization” scheme.

17.There were also numerous material differences between Yukos’ conduct and that of many other Russian oil companies: (a) no other Russian oil company committed abuses that were as egregious as those of Yukos, (b) none did so for as long as Yukos, (c) none attempted to conceal its abuses as did Yukos (to the extent of lying about them to the tax authorities, the courts, and even its own auditors), (d) none obstructed their tax audits as did Yukos, including by sending documents and employees to distant locations before they could be reviewed and interviewed, (e) none made investments in the low-tax regions that were so miniscule in comparison to the tax benefits they claimed, (f) none diverted billions of dollars offshore to prevent the collection of overdue taxes, and (g) none refused to pay their assessed taxes when ultimately required to do so.

18.Fourth, Claimants’ contention that the Russian authorities knew and approved of Yukos’ scheme is completely unsupported by any credible evidence, as the ECtHR again unanimously found. Claimants’ contention cannot be reconciled with Yukos’ unflagging efforts to conceal its scheme from the Russian authorities. Yukos would obviously have had no reason to hide its scheme if it believed the authorities were already aware of it, let alone had approved it, or if it thought its scheme was lawful and its disclosure would not lead to substantial tax claims. Yukos’ efforts to conceal its scheme are reflected in (a) the company’s convoluted offshore structures, serving no purpose other than to mask Yukos’ affiliation with its sham trading shells, (b) Yukos’ seriatim restructuring of its Lesnoy trading shells after their abuse of that

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region’s low tax program was discovered, (c) Yukos’ management’s internal warnings that disclosure of its scheme “will result in substantial tax claims against the Company,” (d) Yukos’ failure to disclose its scheme in its purportedly “transparent” financial statements, and (e) Yukos’ repeated lies about its scheme to the tax authorities, the courts, the ECtHR, and its own auditors.

19.In any event, as a matter of Russian law and as Claimants concede, even if the tax authorities had known of Yukos’ scheme -- and there is no evidence they did -- they would not have been estopped from later challenging it.

20.Fifth, Claimants’ contention that the assessments against Yukos were fabricated as part of a politically motivated campaign to dismantle Yukos – an allegation on which Claimants have unambiguously staked their claims, contending that the assessments “cannot be explained in any other way” -- is, as the ECtHR again unanimously found, unsupported by any credible evidence. If the assessments were, as Claimants insist, the product of a massive political conspiracy spanning several years and involving numerous government agencies, engineered and implemented by hundreds if not thousands of officials, including no fewer than 60 judges at four different levels of courts, along with a large cast of third parties around the globe, then surely after nearly a decade of challenges -- by Yukos, its minority shareholders, and now Claimants -- at least one internal government memorandum, instruction or minute of a meeting evidencing or referring to the grand conspiracy alleged by Claimants would have surfaced, or one disgruntled former Government official would have reported having participated in a meeting or telephone call where the alleged conspiracy was discussed. Instead, Claimants rely solely on double and triple hearsay renditions of purported conversations by vocal opponents of the Russian Government, inaccurate and uninformed reports by political commentators, and sheer innuendo, none of which, even as proffered, competently supports Claimants’ conspiracy allegations.

21.Claimants’ failure to prove the supposed vast conspiracy confirms that it is merely one more sham perpetrated by the Oligarchs who controlled Yukos and were ultimately responsible for its demise.

22.Yukos’ dealings with PricewaterhouseCoopers (“PwC”) provide yet another example of Yukos’ blaming the Russian Federation for the consequences of its own misconduct.

23.PwC withdrew all of its Yukos audit opinions in June 2007 (after refusing to continue to audit the company’s U.S. GAAP financial statements in 2003, itself an extraordinary event for a supposedly “transparent” company), following confirmation that Yukos’ senior managers had repeatedly lied to PwC about, among other things, Yukos’ de facto control over the management of its sham trading shells -- an essential element in the company’s “tax optimization” scheme.

24.Claimants’ attempt to blame the Russian Federation for PwC’s withdrawal of the firm’s audit opinions finds no support in the record. To the contrary, both PwC’s senior Russian representative at the time (in a contemporaneous private conversation with U.S. Embassy officials in Moscow) and PwC’s senior Yukos auditor (in sworn U.S. deposition testimony) confirm that PwC, in withdrawing its audit opinions, acted in accordance with applicable auditing standards, a conclusion supported by Mr. John Ellison, a former KPMG LLP partner, in his unchallenged expert report. The U.S. deposition testimony of Mr. Douglas Miller, the PwC partner in charge of auditing Yukos, is especially relevant, because (a) it was sought by counsel for Messrs. Khodorkovsky and Lebedev on the grounds that it would provide the best opportunity to obtain a truthful account of the reasons for PwC’s actions, and (b) Mr. Miller repeatedly rejected Claimants’ “harassment” theory.

25.On all of these points, the RosInvestCo and Rovime awards are inconsistent with the facts and Russian law, and ignore a wealth of uncontested international practice.

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II.The Russian Federation Is Not Responsible For And Did Not Cause The Unwinding Of The Sibneft Merger

26.The Russian Federation is not responsible for the unwinding of Yukos’ proposed merger with Sibneft because Claimants do not allege -- let alone establish -- that Sibneft was then exercising governmental authority or acting under the instructions of Russian State organs. Nor was the Russian Federation the cause of the unwinding of the merger. To the contrary, the Russian Federation repeatedly supported the proposed merger, and Claimants themselves acknowledge that the Russian Federation provided all of the approvals necessary for the merger, including approvals granted long after the Russian Federation’s supposed attack on Yukos.

27.The merger in fact collapsed because Yukos refused to accommodate Sibneft’s request that Mr. Khodorkovsky, following his resignation from Yukos’ management, be replaced by a Sibneft nominee as head of the to-be merged company. Sibneft’s proposal would have left Yukos representatives in all of the surviving company’s other senior management positions.

28.Documents that Claimants were ordered to produce in these proceedings (over their objection) show that Claimants and Sibneft’s principal shareholders agreed to unwind the merger without the payment of additional compensation by either side, an agreement fatal to Claimants’ request for damages relating to the proposed merger. The same documents also reveal that Yukos’ management proposed its own plan to unwind the merger without the payment of additional compensation, and that this plan contemplated the initiation of a “sham” lawsuit challenging the previously-completed exchange of Yukos and Sibneft shares. The contemplated lawsuit bears a striking resemblance to the actual lawsuit (challenged by Yukos in these arbitrations) that was brought by two of Yukos’ shareholders and ultimately led to the legal unwinding of the merger without the payment of additional compensation.

29.Claimants’ assertion that the US$ 2 billion giga-dividend was required by the Sibneft merger is patently untrue. The record shows that the giga-dividend was approved on November 28, 2003 (and not on September 25, 2003, as Claimants falsely asserted in their Reply), one day after Yukos was informed that the Sibneft merger would not proceed. At the Extraordinary General Meeting of Yukos’ shareholders held on November 28, Claimants voted against all the other shareholder proposals linked to the completion of the Sibneft merger, but supported payment of the giga-dividend “for Yukos” (that is, for Claimants to the extent of 70% of the dividend).

IIIYukos Bears Sole Responsibility For The Consequences Of The Assessments Properly Made Against It, Because It Could Have Avoided Those Consequences -- And Reduced Its Liability By Well More Than Half – By Paying The Amounts Due During The First Quarter Of 2004, While Continuing To Challenge The Assessments In Full

30.During the first quarter of 2004, Yukos could have avoided well more than half of its ultimate tax exposure by paying its corporate profit taxes and the interest then due and by filing proper amended VAT returns in its own name. Had Yukos taken these few simple steps -- abiding by its own tax counsel’s published advice as to how a taxpayer should mitigate its tax liabilities -- it would also have avoided all of the subsequent enforcement measures about which Claimants complain, and still preserved its right to seek a refund of all the taxes it paid.

31.If Yukos had mitigated its liabilities in this way, its total exposure under the Russian court rulings that Claimants challenge in these arbitrations would have been capped at less than US$ 9.8 billion, rather than the US$ 25.8 billion that was ultimately assessed.

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32.Yukos had more than ample resources in the first quarter of 2004 to cap its tax exposure at less than US$ 9.8 billion and to satisfy that liability, even after paying its unprecedented US$ 2 billion giga-dividend, but it elected not to do so.

33.Instead, Yukos pursued an irrational and ultimately self-destructive course of action, for which only the managers of Yukos, installed and controlled by Claimants, are to blame. This course of action included (a) Yukos’ continuing denial of any liability for its assessed taxes, (b) Yukos’ now acknowledged false denial that it controlled the sham trading shells, (c) Yukos’ repeated obstruction of the actions taken by the Russian authorities to enforce and collect the company’s overdue taxes, (d) Yukos’ dissipation of its own assets and those of the companies it controlled, to frustrate the collection of the taxes it owed, and (e) Yukos’ attempt to put pressure on the Russian Government by mounting an aggressive international lobbying and disinformation campaign that sought to politicize what, for the Russian authorities, was always a matter of tax evasion and collection.

34.All of the subsequent enforcement proceedings and other measures about which Claimants now complain were thus the result of Yukos’ own adamant refusal to acknowledge or mitigate its tax liabilities, and its repeated attempts to dissipate and conceal its assets and to frustrate the enforcement and collection of its overdue taxes. Had Yukos not persisted in this self-destructive course of action, there would have been no April injunction (discussed below), and YNG would not have been sold.

35.Permitting Claimants to benefit from Yukos’ self-inflicted wounds would contravene basic legal principles, and provide Claimants with a windfall -- beyond the billions of dollars they have already extracted from Yukos, including by way of dividends, share sales, and stichting assets -- to which they are not entitled.

IV. The Russian Federation Acted Properly In Enforcing The Tax Assessments Against Yukos, Including By Auctioning YNG

36.The tax assessments were enforced against Yukos in compliance with Russian law and after ample notice to Yukos. As the ECtHR unanimously concluded, there is “no reason to doubt that throughout the proceedings the actions of various authorities had a lawful basis and that the legal provisions in question were sufficiently precise and clear.” The enforcement actions were also measured and appropriate in the circumstances and entirely consistent with international practice.

37.Claimants’ and Yukos’ contention that Yukos was “surprised” by the timing of the assessment for 2000 and the need to make prompt payment is false and indicative of Yukos’ lack of good faith. Promptly upon receipt of the December 29, 2003 audit report, Yukos’ internal and external counsel advised Yukos that, under established Russian law and practice, it should expect to receive a final tax assessment within about a month, and that this assessment would require Yukos to make full payment promptly, most likely within one day. In the event, the tax assessment for 2000 was issued on April 14, 2004, more than two months later than Yukos’ advisors had expected, and required payment in two days, not one.

38.Although Yukos had ample notice of when and how much it would be required to pay, it made no effort to marshal the necessary assets, instead claiming that it was not able to pay, even though Claimants now acknowledge that Yukos had sufficient resources to pay all of its 2000 taxes.

39.By the time of Yukos’ April 2004 assessment, the tax authorities had learned that Yukos controlled the Lesnoy shell companies and had sought to prevent the payment of their overdue taxes by dissolving them. The tax authorities thus understandably applied to the Moscow Arbitrazh Court in April 2004 for enforcement of Yukos’ 2000 tax liability and for an injunction prohibiting Yukos from selling or encumbering the company’s shareholdings in its Russian subsidiaries.

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40.As the ECtHR held, the authorities’ actions were neither arbitrary nor unfair:

“[T]he Ministry’s action was lodged under the rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute was insoluble and, regard being had to the circumstances of the case, [the Court] finds no indication of arbitrariness or unfairness […] in this connection.” [emphases added]

41.The April injunction did not affect Yukos’ use of its substantial onand off-shore cash resources, and did not affect Yukos’ offshore assets at all. Yukos nonetheless falsely claimed that the injunction prevented Yukos from paying its taxes, again evidencing its lack of good faith and credibility.

42.No further enforcement efforts were taken for more than two months. During this period, Yukos continued to generate close to US$ 2 billion each month in gross receipts that Yukos partly transferred off-shore and partly used to voluntarily pay its loan to GML’s Moravel shell subsidiary -- but not to pay its tax liabilities.

43.Yukos also began a pattern of diminishing the value of its assets, often to the benefit of Claimants and the Oligarchs whose interests they represented. For example, Yukos forced its production subsidiaries to guarantee Yukos’ already outstanding US$ 1.6 billion loan from Moravel, corroborating the concerns that had led the authorities to obtain the April injunction.

44.Following Yukos’ failure to make (or even to promise to make) any tax payments, as well as its dissipation of substantial assets, Russia’s bailiffs finally attached a number of Yukos’ on-shore bank accounts at the end of June 2004 -- ten weeks after the April tax assessment and 26 weeks after Yukos’ legal advisors advised that it needed to be prepared to pay promptly. It was only then that Yukos began to pay some, but not all, of its taxes.

45.The authorities also sought to seize Yukos’ shares in its production subsidiaries to prevent Yukos from encumbering them. True to form, Yukos attempted to frustrate the bailiffs’ efforts by terminating the share registry company contract for its production subsidiaries and concealing their registries, directing that they be sent from central Moscow to remote locations around the country.

46.Yukos also took steps to reduce the value of its largest production subsidiary, YNG. First, Yukos caused YNG to stop paying its mineral extraction taxes, imperiling its production licenses. Second, Yukos and its trading shells stopped paying YNG for its crude oil, leaving YNG with more than US$ 4 billion in unpaid invoices. And third, Yukos continued to divert funds to GML, its majority shareholder, arranging for the payment of more than US$ 700 million to Moravel, even after the cash freeze orders were in place.

47.Yukos also made a series of bad faith offers to “settle” a portion of its tax liabilities, repeatedly offering Sibneft shares as a partial payment or as security for proposed future payment, even though Russian law did not allow payment in kind, Yukos’ title to the proffered shares had been challenged by a third-party, and an injunction had been issued (at the request of the third-party) prohibiting their sale or encumbrance.

48.During this entire period, nothing prevented Yukos from selling its assets subject to the bailiffs’ approval and using the proceeds to pay its tax obligations.

49.Thus, the authorities found themselves confronted by a company that was fiercely resisting the payment of its overdue taxes, that had previously obstructed its tax audit, lied to the tax authorities and courts, and attempted to make itself and its subsidiaries judgment proof, and that was now burdening the tax authorities’ principal security -- YNG -- with new liabilities. In these circumstances, the bailiffs understandably decided to sell a majority of YNG’s shares -- the only

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realistic way to timely collect Yukos’ unpaid taxes. Despite criticizing the bailiffs for not adequately documenting their decision-making process, the ECtHR concluded that the bailiffs’ actions were not unreasonable. It is commonplace in other countries too for tax collection authorities to sell first the assets that best ensure payment.

50.The sale of the YNG shares was carried out in accordance with Russian law and consistent with international practice. The authorities could have sold the shares to a designated purchaser in a directly negotiated transaction, but instead granted Yukos’ request that the shares be auctioned. A formal and careful appraisal was conducted by DKW, and the starting price for the auction was set at a level consistent with DKW’s appraisal, taking account of the fact that only 76.79% of the company’s shares were sold and that YNG had its own outstanding tax liabilities. All bidders, foreign or domestic, were welcome to participate.

51.Claimants and Yukos did all they could to prevent the auction from succeeding, threatening a “lifetime of litigation” against anyone who participated in or facilitated the sale. Yukos also initiated sham bankruptcy proceedings in Houston, obtaining a temporary restraining order (“TRO”) that prevented all the previously announced bidders and all of their banks from participating in the auction. If the price achieved was lower than it might otherwise have been, the fault lies solely with Claimants and Yukos.

52.The YNG auction achieved a price of approximately US$ 9.4 billion, US$ 500 million more than the starting price. This result was consistent with the shares’ appraised value and contemporaneous fair market value estimates.

53.The evidence does not support Claimants’ contention that the winning bidder, Baikal Finance, conspired with Rosneft. Rather, Baikal Finance found itself unable to finance its winning bid because of the Houston court’s TRO, and thus at risk of losing its US$ 1.7 billion deposit unless a substitute purchaser, not dependent on immediate bank financing, could be found on very short notice. Rosneft simply seized a commercial opportunity that presented itself as a result of Claimants’ misconduct.

54.The net proceeds of the YNG sale were not sufficient to meet all of Yukos’ tax obligations. The Russian authorities nonetheless gave Yukos ample time to pay the remaining balance, but it declined to do so, making clear that its priority was to place assets behind the shield of the Dutch stichtings.

V.The Russian Federation Acted Properly In Connection With Yukos’ Bankruptcy, Which Was Precipitated By Yukos’ Failure To Pay Its Debts To The SocGen Syndicate, And Is Not Attributable To The Russian Federation

55.Claimants’ bankruptcy-related claims fail because critical conduct essential to these claims was taken by actors for which the Russian Federation is not responsible, including the SocGen syndicate, YNG, Rosneft, the Federal Tax Service acting as creditor, the meeting and committee of Yukos’ creditors, Yukos’ interim manager and bankruptcy receiver, the participants in Yukos’ bankruptcy auctions, and the purchasers of the auctioned assets sold. In taking the actions complained of by Claimants, none of these actors was exercising sovereign authority or acting pursuant to the direction or control of sovereign authority. Claimants have provided no evidence on which the Tribunal could make a contrary finding.

56.Yukos’ dilatory and obstructionist treatment of its commercial creditors paralleled closely its treatment of the tax authorities. In both instances, Yukos (a) falsely claimed it was unable to meet its obligations, (b) forced its creditors to pursue their claims in multiple court proceedings where Yukos presented unsubstantiated defenses, (c) offered to negotiate with its creditors only when they were close to collecting their claims, (d) made unrealistic settlement proposals that were

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subsequently withdrawn, and (e) together with its controlling shareholders, strenuously resisted all collection efforts, prompting more aggressive action on the part of its creditors.

57.Both sides agree that Yukos’ bankruptcy was initiated by the SocGen syndicate, based upon Yukos’ failure to pay an outstanding English court judgment after it was recognized in Russia.

58.The SocGen syndicate simultaneously also sought payment of the same debt from Rosneft pursuant to the 2004 loan guarantee that Yukos had foisted on YNG, which Rosneft then owned. Although Rosneft disputed the validity of the guarantee, Rosneft required forbearance from the same banks on covenant breaches arising from the YNG acquisition, and Rosneft needed the banks’ cooperation for its planned IPO. The convergence of the syndicate’s and Rosneft’s commercial interests resulted in their agreeing that Rosneft would pay the syndicate in full, but only after the syndicate had pursued all legal avenues to obtain payment from Yukos, the primary obligor. If Rosneft instead paid, the syndicate’s rights under the loan agreement were to be assigned to Rosneft.

59.Claimants acknowledge that this agreement was commercially-motivated and on commercial terms, but contend that its confidentiality clause evidences a conspiracy on the part of the SocGen syndicate to act secretly on behalf of Rosneft, which Claimants improperly equate with Respondent. The confidentiality clause, however, was itself a standard commercial term necessary to preserve the possibility that Yukos would pay the SocGen syndicate before Rosneft became unconditionally obligated to do so, and remained in effect only for so long as Yukos’ payment would have discharged Rosneft’s own obligation to pay the syndicate.

60.Yukos satisfied the criteria for bankruptcy under Russian law due to its persistent failure to pay its commercial creditors, and was insolvent long before the proceedings were commenced. This is also undisputed.

61.The proceedings were conducted in compliance with Russian law and international practice. The courts properly allowed the Federal Tax Service’s, Rosneft’s and YNG’s claims, and substantial amounts of YNG’s claims were never disputed by Yukos. Belying Claimants’ discrimination charge, the courts also allowed some Yukos related-party claims, but properly rejected other abusive claims, such as the Moravel loan, a barely disguised attempt to turn equity into debt.

62.Yukos’ management, actively supported by Claimants, had the opportunity to present a rehabilitation plan to the meeting of creditors. The rough outline management submitted was, however, legally defective and did not provide any basis for creditors to prefer rehabilitation to liquidation. It was not properly presented to or approved by Yukos’ shareholders, did not meet the legal requirement that the company’s tax claims be satisfied within six months, and did not ensure full, let alone timely, payment of Yukos’ creditors’ claims.

63.Once Yukos’ liquidation was properly approved, the company’s assets were sold at auction in accordance with Russian law and international practice. Yukos’ receiver obtained appraisals for the fair value of the assets, and used those appraisals to set minimum bids in the auctions, all of which were exceeded, some by very large margins. The auctions were open to domestic and foreign bidders, adequately noticed and advertised, and competitive. To the extent that any bidders may have been discouraged from participating, this was again the result of Claimants and Yukos having threatened potential bidders with legal action. While the aggregate results exceeded Yukos’ own (and other) contemporaneous fair market value estimates, more than US$ 9 billion in creditor claims nonetheless remained unsatisfied.

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